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Thursday, October 02, 2003

India on the Up and Up?

With latest figures showing that the Indian economy grew at an annual rate of 5.7% in the first quarter of 2003, the Economist asks whether India is getting ready to rock'n roll:

because of a confluence of benign trends, economic optimism abounds. India's GDP is expected to grow by at least 6% this year, thanks partly to demand from a more robust global economy, and, more importantly, to the most bountiful monsoon for many years. Almost half of India's GDP still comes from the countryside.

A stockmarket surge has been barely dented by the Supreme Court ruling or even, for more than a few hours, by the deadly terrorist bombings in Mumbai last month. Earlier this month, the index covering the Mumbai exchange touched levels not seen since February 2001, having climbed by more than 50% since April. Profits of companies included in the index were up by an estimated 50% in the second quarter of 2003, compared with the same period in 2002.

True optimists look far beyond the stockmarket. Painful reform and restructuring in the 1990s, they say, is paying off. Shorn of the protections and blandishments of what became known as the 'licence raj', and more open to foreign imports, India is now producing companies that can compete with any in the world. These include not just the well-known successes in information technology and pharmaceuticals, but also businesses in 'old economy' industries: cars and car parts, motor-cycles, cement and steel.

In 2002, a subdued year for the world economy, India's exports grew by 19.2%, a rate beaten only by China, whose currency, Indian exporters point out, is notoriously undervalued, whereas the rupee has, unusually, been appreciating against the dollar. However, India's is still, in global terms, an economy that has a long way to go before it looks very much like a tiger. Last year it accounted for just 0.8% of world exports.

It is true that many Indian firms are exhibiting new signs of self-confidence. Indeed, China itself, long seen by Indian businesses as a threat, is now seen by some as an opportunity. The success there of Indian steelmakers, to take an old economy example, has been such that they have been exceeding the quantitative quota (3% of steel imports) that China imposes on them.

Asked to explain the rosier outlook, manufacturers cite one factor above all: the sharp decline in interest rates - from an annual rate of roughly 12% to half that - in the past five years. Besides beautifying company balance sheets, this is encouraging consumers to borrow, to buy cars, for example, and build houses.
Source: The Economist

India to Sign Asean Trade Deal

Hot on the heels of the Cancun breakdown, India announces a new trade deal with the south East Asian Nations.

India is to sign an agreement next week with the 10 member states of the Association of South East Asian Nations (Asean) leading to the creation of a full free trade area within a decade. Yashwant Sinha, India's foreign minister, said the framework agreement had been negotiated over the past year, and would be signed next week at the Asean summit in Bali, Indonesia. India is also close to signing bilateral trade deals with both Singapore and Thailand. "We are getting much more deeply engaged in south-east Asia," Mr Sinha told the Financial Times in an interview in London. "This will certainly boost our trade and economic relationship with the region."

Progress on negotiating the framework agreement with Asean has been unusually rapid by Indian standards, in a sign of the importance of the deal to both sides. India has watched with some misgivings neighbouring China's dramatic trade growth with Asean over the past decade. But Indian officials say Asean also wants to counter-balance China's growing economic dominance of the region by strengthening ties with a market the size of India. Indian exports to Asean were $4.8bn last year, just 8 per cent of its total exports. Officials say this could rise sharply.

The deal would go some way to answer those critics who point out that India imposes higher tariffs on developing country imports than on western ones. India has been criticised for playing an influential role in helping bring about a collapse of the trade talks in Cancun last month. "If we have regional trading arrangements with Asean, they will become beneficiaries of lower tariffs with India," said Mr Sinha.
Source: Financial Times

Wednesday, October 01, 2003

Reinforcing Edwards point about Indian manufacturing, Manufacturing in India grew by 6% in Q1. (Financial Express story here).

Agriculture reported only 1.7% growth as opposed to 2.7% during Q1 to 2002-2003, even though the monsoon was the best in recent memory. Pranab Sen. a planning commission adviser said that "The impact of the good monsoon will be reflected in robust agricultural growth in the second and third quarters of the fiscal. Depending on how well agriculture does, the economy could grow between 6.5 per cent to 7 per cent this year".

Agriculture still contributes close to 40% of the GDP in India. Edward linked to an interesting sssay on Ladakhi agriculture a few weeks back. It is a little late to comment on that article, but I couldnt get down to doing it before now. I empathize with the opinion expressed by Sunita Narain in that article. I just don't agree with it.

I think the invasion of products, culture and services from the plains is killing not just Ladakhi agriculture, but is contributing to rapid mutation (mostly for the worse) of the entire socio-cultural systems of all the Himalayan states/nations in South Asia from Uttarakhand to Tibet. Unfortunately, the traditional modes of agriculture in Himalayas can no longer meet the challenges posed by the increases in population, aspiration and changes in taste. There are three simple reasons why sustaining the traditional means of agriculture in Ladakh will not work:

Food from the plains is cheaper
It is tastier
Ladakhi agriculture cannot scale up to the demand generated by tourism

Why should the Ladakhis be forced to eat Barley when the implants from the plains and the tourists can have rice or wheat ? At least the younger generation who are growing up with TV won't pay for it. Why invest additional money for retaining a way of living, which is not going to survive a collision with modern lifestyles, as we can see elsewhere in the Himalayas. As things stand, We need to find a way for these farmers to augment their livelihood by other trades (e.g. tourism which is increasingly becoming the dominant force in Ladakh) rather than help them keep wherever they are.

But her article does raise the important point about sustaining small farmers who contribute a disproportionate percentage of our agricultural productivity. I was browsing through an FAO report which says

Small-holder farmers (defined as marginal and sub-marginal farm households that own or/and cultivate less than 2.0 hectare of land ) - constitute about 78 per cent of the country's farmers (at Agricultural Census 1990-91). But they own 33% of land and contribute 41% of national grain production. They constitute more than half of nation's population and nation's total of hungry and poor.

The questions are here posed: is the continuance of Indian hunger and poverty a consequence of the smallness of the preponderant majority of the nation’s farms? Or may the productivity of those small farms be so increased as to allow the smallholder families - and the nation with them - to escape from hunger and poverty?

Obviously, the small farmers dont have the means to increase the productivity of their farms. But there are several things other things going here.

In large parts of Northern India, Tamil Nadu etc. land reform did not really take place. A vast percentage of the large landowning families that gained their land during British occupation (or in the era predating that), managedwilly nilly to hold on to it by various legal and illegal means. Every time there was momentum for land reform, the landowners got away by giving away the worst pieces of farming land to the small farmers. I am not sure whether land reform is called for or whether it is practical, but the relatively better agricultural productivity in West Bengal where land reform is one of the very few successful legacies of the left front government there, suggests that taking a fresh look at land reform may not be such a bad idea.

On the other hand, the consensus among economic thinkers in India seems to be that the increasing fragmentation of land holdings is what is ailing Indian agriculture. I would be interested to hear what others think on this.

We also seem to have lost steam after the green revolution of the sixties and seventies and bypassed the more painful agricultural reform issues that need to have followed through. The investment that is going into agriculture seems to be feeding the politically powerful vested interests in the form fo subsidies rather than contributing to productivity. The finance minister seems to have thrown up his hands temporarily. Towards the end of a rather interesting interview with the Jaswant Singh (the finance minister), the Business Standard asked him about the agriculture subsidies:

Is government expenditure under control? You have a problem with the food and fertiliser subsidies. Can't we move away from the minimum support price mechanism to income-based support for farmers?

Food subsidy is something that I cannot reduce. We tried to address this whole issue in yesterday's advisory council meeting. We have to continue with the agriculture subsidy because we have the largest irrigated arable land mass in the world. It's a great asset. When I was doing my homework in this job, I realised it. It will be very difficult for India to move away from this minimum support price system in the near future.

Some of the other departments are looking at income-support alternative......

Yes, it will take time. You see, people have got used to the MSP system. Is it a perfect system? No. Is it just and equitable? Perhaps not the most just and equitable. It is a high cost system, I agree. I have to go to an income-based support, I agree. This is one of the issues that emerged in the meeting. Unless I have perfect transition from MSP to income-based support and unless I have the states of India on board the transition - because you know it is a concurrent subject - I cannot unilaterally decide. I do believe that the future is to give correct income-based support to farmers, without doubt. The United States of America also gives $ 360,000 every third year to maize growers, to not grow maize, $ 2 a day to every cow. But look at our plantation sector, coffee, tea. I just cannot, under any circumstances, neglect this agro industry, which is 150 years old.

The subsidy makes least sense on fertiliser, because the farmer is paying the international price anyway...

I will come to that. Fertiliser, I do believe, is the most inefficient of all subsidies. It is also a subsidy where the farmer does not benefit and we are subsidising inefficient fertiliser producers. I attempted to take the first corrective step in this when I presented the Budget. But I got such a rap on my knuckles.... So what do I do?

But you have a runaway subsidy bill.

Not runaway. It's not a horse that has bolted. I have ridden horses which are hard-mouthed. I do think that I can prevent a runaway situation.